British travel writer Jan Morris fittingly subtitled her book Hong Kong on the British Crown colony’s 150-year-long history Epilogue to an Empire. In a sense, the 1997 handover could therefore be described as prelude to China’s rise.

Iconic, glitzy skyscrapers line Queen’s Road in the Central district of the city - the Bank of China Tower, the HSBC Building and Standard Chartered Bank Building. This is the place from where Hong Kong evolved into an international financial hub. The skyscrapers tower over the two-story neo-classical Supreme Court Building, which used to be the seat of the Legislative Council until it moved to new premises in 2011, on the opposite side of the street.

On the surface, the hustle and bustle of the city appears unchanged, but it goes without saying that a transfer of power and influence has taken place in the political and economic fields.

Foreign Investment Unlike Chinese Investment

The government and the Legislative Council of the Hong Kong Special Administrative Region have moved to newly built complexes on the reclaimed Tamar site, right next door to the People’s Liberation Army (PLA) headquarters building. The influence of British trading houses, which dominated economic life in Hong Kong in the 1990s, has waned.

Foreign business houses such as Jardine Matheson & Co and the Swire Group, who set up shop in Hong Kong in the 19^th century to trade with China’s Qing Dynasty, have lost much of their former colonial luster. As Hong Kong’s flag carrier Cathay Pacific, which belongs to the Swire Group, incurred losses worth 575 million Hong Kong dollars (nearly NT$2.3 billion) last year, the airline had to lay off almost 1,000 employees in two personnel cuts.

On the Chinese investor side, however, everything seems bright and promising.

The Hainan-based conglomerate HNA Group recently drew public attention with a series of real estate deals. Within five months, the Group acquired four plots of land totaling 37,000 square meters at the former site of Hong Kong airport above market price for a total of 27.2 billion Hong Kong dollars.

Bloomberg News reported in June that Chinese financial companies “now dominate as sponsors in Hong Kong’s market.” While foreign financial firms were the leading underwriters of IPOs in Hong Kong in 1997, today, nine out of ten are Chinese.

A financial industry veteran recalls that Hong Kong Central used to be dominated by Japanese commercial banks in the 1990s, whereas Chinese-funded banks now prevail. As the highest valued stock, Chinese Internet giant Tencent Holdings Ltd. is the undisputed king of the local bourse, accounting for 10 percent of the market cap of the Hang Seng Index. In its latest annual report, the Hong Kong Exchanges and Clearing (HKEX) said that Chinese-funded companies already account for 60 percent of the local bourse’s market capitalization.

Over the past two decades, Chinese-funded companies, Chinese-backed financial institutions and Chinese talent have formed a dense, ever-more-influential network in Hong Kong.

China Goes Global via Hong Kong

 “Now, Hong Kong cannot get around China,” says Antony Dapiran, who was in charge of the Hong Kong IPO of the Postal Savings Bank of China in 2016, the largest IPO worldwide in that year. Dapiran, until recently partner at the Hong Kong office of U.S. law firm Davis Polk & Wardwell, sums up his work experience over the past years, saying, “If the clients of the projects that you handle are not Chinese-funded companies, your negotiation partners’ clients will surely be Chinese enterprises.”

Dapiran, who hails from Australia, nurses a New Zealand beer at a restaurant in Tong Chong Street near Quarry Bay subway station. Visible outside the window is Taikoo Place, the financial district in the East of Hong Kong Island. Office rents here are one third cheaper than in Central, which is why many international financial services companies such as Citibank, DBS, JP Morgan Chase & Co, and AXA have moved their Asia regional offices to the area. On Friday evenings, the bars in Tong Chong Street teem with foreign office workers from the finance industry, whereas in Central the Chinese-speaking employees of Chinese investment banks dominate.

Dapiran came to Hong Kong after graduating from Peking University in 1999. In the following 18 years, he shuttled back and forth between Beijing and Hong Kong, advising on numerous IPOs for prestigious Chinese companies, including China Construction Bank, ICBC, Agricultural Bank of China, and The People’s Insurance Company (Group) of China. Having handled IPOs worth a total of US$70 billion, Dapiran is a pioneer in Chinese IPOs among Hong Kong-qualified lawyers. He also brought with him the most important skill in Hong Kong’s professional services: “understanding China.”

 “This is definitely Hong Kong’s core advantage. Hong Kong is very ‘useful’ for China,” says Dapiran.

After China joined the World Trade Organization in 2001, China’s state-owned enterprises urgently needed international capital and foreign currency to develop their domestic business. They also used stock market listings to spur internal reform. Against this backdrop, the Hong Kong stock market became the most important destination for Chinese companies to go public.

During the past decade, Hong Kong was also the biggest source of foreign direct investment (FDI) for China, accounting for some 60 percent to 70 percent of all foreign capital inflows every year. But even in that area, the situation has shifted. Since 2015, China has been an exporter of direct investment as the nation’s outward direct investment (ODI) exceeded inward foreign direct investment.

 “What China has now is money. They don’t need international investors; what they need is prestige. Listing on the Hong Kong stock market serves to increase [Chinese companies’] creditworthiness; foreign investors will then be more willing to make transactions,” says Dapiran.

All in One Hand – Enterprises, Banks, Talent

The financial crisis in 2008 provided an opportunity for China to rise as hard-hit Europe and the United States were struggling to get back on their feet. When China expanded renminbi trade and banking services in Hong Kong in 2012 to develop an international role for the national currency, Chinese companies began to go global, launching a buying spree around the world. As Hong Kong became their offshore credit center, the territory saw another boom.

A finance industry insider estimates that the number of jobs increased around 20% during these three or four years, whereas now massive layoffs are the rule.

Hong Kong's loan volume hit a record US$106 billion, showing a 22% rise year-on-year, boosted by financing packages for overseas acquisitions by ChemChina (China National Chemical Corporation) and Tencent last year, according to Reuters. Given that China has recently tightened capital controls so that Chinese companies face difficulties taking capital out of the country, Hong Kong has become an important source of offshore loans for Chinese-funded enterprises. These include Chinese developers who snap up Hong Kong land at high prices and infrastructure projects in connection with China’s One Belt, One Road initiative.

Bloomberg reported in August of 2016 that Chinese banks had led global syndicated loans worth US$19.9 billion for international mergers and acquisitions so far that year. This brought their market share up to 4.4 percent from 0.9 percent in 2015. Bloomberg data show that Chinese companies announced a record US$250 billion in foreign acquisitions in 2016, up from US$109.2 billion in 2015.

In comparison to conservative Hong Kong and foreign banks, Chinese-funded banks are less risk adverse when it comes to approving loans.

The M&A spree has helped them gain market share. Just like thirty years ago, when Hong Kong investors began to replace British investors, Chinese investment banks grab market share with low prices.

A PR official with a well-known Hong Kong real estate company points out that, while Hong Kong is said to be a place with free market competition, local Hong Kong realtors face great pressure as Chinese-backed banks readily grant loans to rival Chinese-funded real estate companies. Hong Kong media reported in March that bank syndicates behind Chinese property developers such as Vanke Property and HNA Group had granted loans worth nearly 19.8 billion Hong Kong dollars so far this year. Chinese-funded enterprises and Chinese-backed banks are working hand-in-hand, which makes Hong Kong the best platform for Chinese state capitalism to take advantage of a free market.

This trend also manifests itself in rising demand for Chinese talent. Some 100 lawyers work at Dapiran’s former employer in Hong Kong, including about 50 to 60 percent Hong Kong people and one third who hail from China. But as Dapiran observes, about 70 percent of the staff at Chinese-backed investment banks is talent from China.

How Much More Time Does Hong Kong Have?

As the iron triangle of Chinese enterprises, Chinese-backed banks and Chinese talents gains increasing clout in Hong Kong, where does that leave the territory’s competitive advantages?

 “As a part of China, Hong Kong is China’s overseas window. The most important change over these twenty years is that Hong Kong became the center for Chinese outbound capital. Other financial centers such as Singapore cannot compare with this special position,” notes Helen Wong, CEO for Greater China at international banking and financial services company HSBC.

We interview Wong on the top floor of the HSBC Corporation Headquarters Building in Central. The full-height glass front offers a bird’s eye panoramic view of the Mid-levels, Central, Admiralty and Victoria Harbor.

Although established in 1865 by a Scottish financier, locals refer to the London-headquartered bank as “Hong Kong bank.” Meanwhile, the multinational company has grown into the biggest foreign bank in China. In recent years HSBC has made great efforts to promote China's One Belt, One Road initiative, which it considers a guarantor of Hong Kong’s survival.

Wong acknowledges that Chinese banks have a competitive edge in the Chinese market due to their interpersonal networks. Hong Kong, however, still wins when it comes to professional services and rich experience. Hong Kong boasts a stable financial structure with regard to the rule of law, accounting, legal expertise, arbitration and industry oversight, on top of a large talent pool. These are the reasons why Hong Kong has made its way into the “Nylonkong” league alongside global financial hubs New York and London.

This world definitely has room for more financial centers,” says Wong.

“Hong Kong understands how things are done in the mainland and is well connected to overseas markets, too. For Chinese companies who want to go abroad directly, finding the right listing and legal counsel is rather difficult. Hong Kong knows how to provide services, so the safe way to go global is dispatching staff to Hong Kong first to prepare a plan,” Wong says.

“Hong Kong still has another 20 years,” says a high-ranking PR official with a Hong Kong bank who has worked in Shanghai for many years. Shanghai bragged in 2008 that it would become a global financial center by 2020. In terms of transaction value, Shanghai has already surpassed Hong Kong, but it still has a long way to go to provide the freedom, fairness and transparency of an international financial hub, the official points out. “Hong Kong needs the mainland, and the mainland needs Hong Kong. Actually, whether Hong Kong is doing well or not is an indicator for everyone.”

When Values Clash

Yet Mike, a young Hong Kong native who is a high-ranking sales manager with an international bank, has a strong sense of crisis.

 “Our industry colleagues in mainland China learn very fast,” remarks Mike. After entering the banking business in 2008, Mike worked at a local bank and an international bank. He also has experience working in a Chinese-funded enterprise. He is acutely aware that Hong Kong's financial industry has lost its competitive edge vis-à-vis China in the past three or four years.

He illustrates the changes with his personal experience in developing his bank’s China business in collaboration with Chinese partner banks over the past years. In the beginning, he was given the red-carpet treatment as a vice president of the local bank would respectfully wait for him at the Shenzhen border and take him to a good restaurant for lunch before meeting clients. Slowly, the Chinese bank representative meeting him at the border became a lower-level manager and then the driver. Eventually, the Chinese side would not even arrange a pickup at all. When Mike now makes a phone calls to the Chinese bank, they ask for reference materials to study.

“Lately the strongest impression that I get when going to mainland China is that they are not strangers to what you call the outside world. Instead, they feel you don’t understand the domestic situation, not that they don’t understand the situation abroad.”

Over the past decade, Mike has discovered that the Chinese financial market offers a host of high-risk products. Be it product issuance, business model or transaction structure, these products all cater to domestic demand and match systemic and supervisory requirements. Change happens so fast that Hong Kong or other markets cannot keep pace.

“China’s financial supervision is also dynamic, sometimes loose, sometimes tight, outsiders are entirely unable to understand how the domestic products work. Hong Kong lacks such innovation. The development and success that the Chinese financial industry has experienced over the past decade doesn’t have much to do with Hong Kong,” says Mike.

Dapiran, however, is convinced that “‘trust in the system’ is Hong Kong’s core value.” Hong Kong’s unique, irreplaceable advantage is still its British legacy: A common law system that is widely used in the global economy and international standards for financial oversight.

Mike, however, has observed that for Chinese enterprises, international standards have less significance since China is not changing Hong Kong on the system side but exerts its influence through market participation. “Because they have a say, you won’t be able to do any business in the financial market if you do not make adjustments for them. Financial supervisors will probably stand firm, but the market won’t. In the future, we will see a game of Chinese chess unfold between the supervisors and the supervised. Depending on who wins and who can’t defend their position, the system will have to change. It is only a question of time; change will come very quickly,” Mike predicts.

“Formerly, we thought [one country] two systems in China and Hong Kong only means we’re running at different speeds on the same track. Twenty years later, we finally realize that China and Hong Kong are simply running on different tracks,” notes Lau Sai-leung, a former member of the Democratic Party of Hong Kong and one-time research director with the Central Policy Unit of the Hong Kong SAR Government.

Lau, also a well-known current affairs commentator and multimedia journalist, firmly believes that unless Hong Kong people who defend “Hong Kong values” take charge of the British colonial legacy, Hong Kong will not be able to realize its competitive edge as a system that is still useful for China.

But a financial professional who requested anonymity also observes that Hong Kong’s oversight system is already being undermined by Chinese enterprises who do not truly observe the law.

In recent years, Hong Kong has seen numerous financial scandals such as Chinese enterprises doctoring the books, Chinese investors manipulating stock prices and insider trading.

“The more Hong Kong and China integrate, the worse it is for internal oversight,” the professional warns. The rule of law and arbitration remain the last lines of defense for the international financial center that is Hong Kong today. Yet the future looks bleak as the territory’s political leeway continues to shrink.

Translated from the Chinese by Susanne Ganz